Venture capital sector rises from tech wreck

The Australian venture capital industry is beginning to recover from the fallout from the tech bust, with investment levels rising significantly in 2003.

Investment rose 26.6 per cent to $938 million after falling almost by half in 2002, according to Private Equity Media and PricewaterhouseCoopers' Australian Venture Capital Survey.

However, 55 per cent of venture capital investments went into various types of buy-outs of existing businesses - the vital seed, start-up and early-expansion phases accounted for only 16 per cent of investment.

Both early-stage and expansion-stage venture capital investments, the levels vital to the encouragement of new businesses, fell in absolute terms.

Early-stage investments declined to $150 million from $194 million a year earlier. Expansion-stage investments fell to $217 million from $254 million in 2002.

Private Equity Media director Victor Bivell said that the trend to buy-outs had been evident for some years as the relative risks of greenfields investments in the wake of the tech collapse had dented confidence.

"Early-stage investment has yet to emerge from its out-of-fashion status of the last few years," he said.

However, the decline in investment in early-stage categories in recent years had been far lower than the decline in overall dollar amounts. That indicated that deals were getting smaller but the venture capital industry was still committed to investment, Mr Bivell said.

While last year's investment level of $983 million is a significant improvement, it is still well shy of the figures for the early years of the decade. In 2000, $1.08 billion was invested in venture capital, and in 2001 the record level of $1.57 billion was reached.

Victoria topped the investment table for the second year in a row, recording $299.3 million in venture capital raisings compared with $289 million for NSW, in second place.

But Victoria's share dipped last year, when it received 31.9 per cent of investment dollars, compared with NSW's 30.8 per cent. In 2002 Victoria received 39.7 per cent of funds invested while NSW got only 27.8 per cent.

NSW did better than Victoria in the number of investments made, recording 142 individual deals, compared with 104 in Victoria.

The direction of venture capital investment changed dramatically in 2003. The categories of health/biosciences, transport and information technology managed to improve their overall investment to 21.7 per cent, 15.4 per cent and 13.5 per cent respectively.

In the previous year, business services was the top investment destination, accounting for 23.3 per cent of the total, while consumer manufacturing was at 13.6 per cent. These two categories fell to 5.4 per cent and 6.9 per cent respectively in 2003.

The survey for the first time included a section on infrastructure investments - $2.3 billion was ploughed into this category in 2003. Airports dominated the category with 49 per cent of investments, or $1.13 billion.

Much of it seems to have been invested by Macquarie Airports as NSW and Italy, where Macquarie bought airports, dominated the investment destinations, with 34.9 per cent and 35.4 per cent respectively.